QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2011

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from ________________ to _________________

0-16438

(Commission File Number)

NATIONAL TECHNICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

California

95-4134955

(State of incorporation)

(I.R.S. Employer Identification No.)

24007 Ventura Boulevard, Suite 200, Calabasas, California

(Address of principal executive offices)

(818) 591-0776

91302

(Registrant's telephone number, including area code)

(Zip code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232,405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “ large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

The number of shares of common stock, no par value, outstanding as of June 7, 2011 was 10,252,064.

The consolidated financial statements include the accounts of National Technical Systems, Inc. (“NTS” or the “Company”) and its majority-owned or otherwise controlled subsidiaries. In accordance with authoritative guidance released by the Financial Accounting Standards Board (“FASB”) clarifying that a noncontrolling interest held by others in a subsidiary is to be part of the equity of the controlling group and is to be reported on the balance sheet within the equity section as a distinct item separate from the Company’s equity and reported separately on the balance sheet. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the consolidated balance sheets.

These statements should not be construed as representing pro rata results of the Company’s fiscal year ending January 31, 2011 and should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended January 31, 2011.

The statements presented as of April 30, 2011 and for the three months ended April 30, 2011 and 2010 are unaudited. In management's opinion, all adjustments have been made to present fairly the results of such unaudited interim periods. All such adjustments are of a normal recurring nature.

2.

Income Taxes

Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year, as adjusted for any discrete taxable events that occur during the period.

The Company files income tax returns in the United States (“U.S.”) on a federal basis and in many U.S. state and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company does not anticipate that its total unrecognized tax benefits or obligations will significantly change due to the settlement of examinations or the expiration of statutes of limitation during the next twelve months.

3.

Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets consists of cumulative equity adjustments from foreign currency translation and unrealized gains or losses on marketable securities. During the three months ended April 30, 2011, total comprehensive income was $755,000 which includes foreign currency translation gain of $30,000. During the three months ended April 30, 2010, total comprehensive income was $3,592,000 which includes foreign currency translation loss of $26,000.

4.

Inventories

Inventories consist of accumulated costs applicable to uncompleted contracts and are stated at actual cost which is not in excess of estimated net realizable value.

5.

Noncontrolling Interests

Noncontrolling interest in the Company’s NQA, Inc. subsidiary is a result of 50% of the stock of NQA, Inc. being issued to Ascertiva Group Limited formerly NICEIC Group Limited. Profits and losses are allocated 50.1% to NTS, and 49.9% to Ascertiva Group Limited. The balance in noncontrolling interests as of January 31, 2011 was $956,000. Net income attributable to noncontrolling interests for the three months ended April 30, 2011 was $165,000, resulting in a noncontrolling interest balance of $1,121,000 as of April 30, 2011.

6.

Earnings Per Share

Basic earnings per share have been computed using the weighted average number of shares of common stock outstanding during the year. Basic earnings per share exclude any dilutive effects of options, warrants, non-vested restricted shares and convertible securities.

As of April 30, 2011 and January 31, 2011, the Company had the following acquired intangible assets:

April 30, 2011

January 31, 2011

Gross

Net

Estimated

Gross

Net

Estimated

Carrying

Accum.

Carrying

Useful

Carrying

Accum.

Carrying

Useful

Amount

Amort.

Amount

Life

Amount

Amort.

Amount

Life

Intangible assets subject to amortization:

Covenants not to compete

$

890,000

$

577,000

$

313,000

3-10 years

$

890,000

$

531,000

$

359,000

3-10 years

Customer relationships

11,947,000

2,677,000

9,270,000

3-15 years

11,947,000

2,438,000

9,509,000

3-15 years

Accreditations and certifications

20,000

14,000

6,000

5 years

20,000

13,000

7,000

5 years

Trademarks and tradenames

58,000

28,000

30,000

3 years

58,000

23,000

35,000

3 years

GSA Schedule

800,000

30,000

770,000

10 years

800,000

-

800,000

10 years

Total

$

13,715,000

$

3,326,000

$

10,389,000

$

13,715,000

$

3,005,000

$

10,710,000

Intangible assets not subject to amortization:

Goodwill

$

20,004,000

$

20,004,000

Trademarks and tradenames

400,000

400,000

Total

$

20,404,000

$

20,404,000

8.

Equity

Equity Incentive Plans

The Company has two employee incentive stock option plans: the “2002 stock option plan” and the “2006 equity incentive plan.” The 2006 equity incentive plan replaced the 2002 stock option plan, which was terminated early and no further options will be granted under it.

Additional information with respect to the option plans as of April 30, 2011 is as follows:

Shares

Weighted Avg.

Exercise Price

Weighted Avg.

Remaining Contract

Life in years

Aggregate Intrinsic

Value

Outstanding at January 31, 2011

582,200

$

4.09

2.86

$

2,077,000

Granted

-

-

Exercised

-

-

Canceled, forfeited or expired

-

-

Outstanding at April 30, 2011

582,200

$

4.09

2.62

$

2,382,000

Exercisable at April 30, 2011

582,200

$

4.09

2.62

$

2,382,000

For the three months ended April 30, 2011, potentially dilutive securities representing approximately 1,000 shares of common stock, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. No such dilutive securities were outstanding as of April 30, 2011.

There was no compensation expense related to stock options for the three months ended April 30, 2011 and 2010. As of April 30, 2011, there was no unamortized stock-based compensation expense related to unvested stock options, as the options are fully vested.

The Company’s non-vested restricted shares, which were part of the 2006 Equity Incentive Plan, vest at 25% per year commencing with the first anniversary of the grant date. Compensation expense, representing the fair market value of the shares at the date of grant, net of assumptions regarding estimated future forfeitures, is charged to earnings over the vesting period. Compensation expense included in general and administrative expenses in the Company’s consolidated statement of income, relating to these grants was $73,000 for the three months ended April 30, 2011. As of April 30, 2011, 145,000 non-vested shares were outstanding at a weighted average grant date value of $4.83. As of April 30, 2011, there was $469,000 of unamortized stock-based compensation cost related to unvested shares which is expected to be recognized over a remaining period of 39 months.

On September 21, 2010 the Board of Directors adopted a shareholders rights plan. Pursuant to the Shareholders Rights Agreement entered into to effect the rights plan, the Board of Directors declared a dividend distribution of one right for each outstanding share of common stock on the record date of October 1, 2010. The rights also attach to subsequently issued shares of common stock. Each right, when it becomes exercisable, entitles the registered holder to purchase from the Company one one-hundredth (1/100th) of a share of the Company's Series A Junior Participating Preferred Stock, no par value ("Preferred Stock"), at a per-share exercise price of $30.00 in cash, subject to adjustment. The rights will expire at the close of business on September 20, 2020, unless earlier redeemed or exchanged by the Company. The Board will review the rights plan at least once every year to determine whether any action by the Board is necessary or appropriate.

This summary description of the shareholders rights plan does not purport to be complete and is qualified in its entirety by reference to the Shareholder Rights Agreement and the other documents referenced therein.

9.

Fair Value Measurement

The accounting standard for fair value establishes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3

Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The following inputs were used to determine the fair value of the Company’s investment securities and contingent consideration obligations at April 30, 2011:

Total

(Level 1)

(Level 2)

(Level 3)

SERP investment in mutual funds

$

3,067,000

$

3,067,000

$

-

$

-

Liability on earn-out for MSI acquisition

500,000

-

-

500,000

Total

$

3,567,000

$

3,067,000

$

-

$

500,000

The fair value of the contingent consideration related to the MSI acquisition was estimated by applying the income approach. That measure is based on significant inputs not observable in the market, which are referred to as Level 3 inputs. Key assumptions include the discount rate and probability adjusted revenues.

10.

Advances to Potential Acquisition Target

During the quarter ended April 30, 2011, the Company paid advances to a potential acquisition target of$900,000, partially secured by assets of the target and personal guaranties. The advances are recorded in other assets and will be credited against the purchase price, if the transaction is consummated. The financial impact of the transaction cannot be estimated at this time. While it is anticipated that this transaction will be consummated in fiscal year 2012, there is no certainty that this will occur.

11.

Subsequent Events

Subsequent events have been evaluated up to and including the date these financial statements were issued.

Except for the historical information contained herein, the matters addressed in this Item 2 contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These matters contain certain statements that relate to future plans, events or performance. These forward-looking statements involve risks and uncertainties, including risks associated with uncertainties pertaining to customer orders, demand for services and products, development of markets for the Company’s services and products and other risks included in the Company’s Annual Report on Form 10-K. Actual results, events and performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

This discussion should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2011 and the consolidated financial statements included elsewhere in this report.

GENERAL

The Company is a diversified business to business services organization that supplies technical services to the defense, aerospace, telecommunications, automotive, energy and high technology markets. Through its wide range of testing facilities and certification services, the Company’s services allow its customers the ability to sell their products globally and enhance their overall competitiveness. NTS is accredited by numerous national and international technical organizations which allow the Company to have its test data accepted in most countries.

The Company operates facilities throughout the United States and in Japan, Vietnam, Canada and Germany, providing highly trained technical personnel for engineering services, product certification, product safety testing and product evaluation. In addition, it performs management registration and certification services to ISO related standards.

The following discussion should be read in conjunction with the consolidated quarterly financial statements and notes thereto. All information is based upon unaudited operating results of the Company for the three-month periods ended April 30, 2011 and 2010.

RESULTS OF OPERATIONS

REVENUES

Three months ended April 30,

2011

% Change

2010

Diff

(Dollars in thousands)

Total revenues

$

37,510

3.8

%

$

36,132

$

1,378

For the three months ended April 30, 2011, consolidated revenues increased by $1,378,000 or 3.8% when compared to the same period in fiscal 2011. Organic growth of $755,000 or 2.1% was primarily due to growth in the energy and telecommunications markets, partially offset by a decrease in the defense market. Acquisition growth of $623,000 or 1.7% was from the purchase of Mechtronic Solutions Inc., on December 16, 2010.

GROSS PROFIT

Three months ended April 30,

2011

% Change

2010

Diff

(Dollars in thousands)

Total

$

9,266

(14.1

)%

$

10,784

$

(1,518

)

% to total revenues

24.7

%

29.8

%

-5.1

%

Total gross profit for the three months ended April 30, 2011 decreased by $1,518,000 or 14.1% when compared to the same period in fiscal 2011. This decrease was primarily due to changes in the mix of services sold and delays in defense program funding by the government which impacted our most recent acquisition as well as some of our other facilities.

Total selling, general and administrative expenses increased by $353,000 or 4.7% for the three months ended April 30, 2011 when compared to the same period in fiscal 2011. This increase was primarily due to increased legal and advisory expenses related to certain shareholder, acquisition, fee dispute and employment issues and outside services related to the implementation of our enterprise resource planning system, partially offset by a decrease in bonus expense related to the lower profitability in the first quarter and a decrease in compensation and travel related expenses as a result of the Company’s recent reduction in force and cost cutting initiatives.

OPERATING INCOME

Three months ended April 30,

2011

% Change

2010

Diff

(Dollars in thousands)

Total

$

1,492

(55.1

)%

$

3,325

$

(1,833

)

% to total revenues

4.0

%

9.2

%

-5.2

%

Operating income for the three months ended April 30, 2011 decreased by $1,833,000 or 55.1% when compared to the same period in fiscal 2011, primarily as a result of the decrease in gross profit and increase in selling, general and administrative expenses. Operating income as a percentage of revenues decreased by 5.2% to 4.0% in the current year when compared to 9.2% the same period in the prior year.

INTEREST EXPENSE

Net interest expense decreased by $5,000 to $291,000 in the three months ended April 30, 2011 when compared to the same period in the prior year.

OTHER INCOME

Other income was $50,000 for the three months ended April 30, 2011, compared to other income of $2,991,000 for the same period in the prior year. The income in the prior year was primarily due to the gain on the sale of the Company’s Virginia property of $3,017,000, partially offset by other non-recurring expenses.

INCOME TAXES

The income tax provision rate for the three months ended April 30, 2011 was 42.0% compared to 39.9% for the same period in the prior year. Management has determined that it is more likely than not that the deferred tax assets will be realized on the basis of offsetting them against the reversal of deferred tax liabilities. The Company analyzes the value of the deferred income tax asset quarterly in conjunction with external reporting.

NET INCOME

Net income for the three months ended April 30, 2011 was $725,000 compared to $3,618,000 for the same period in fiscal 2011. This decrease was primarily due to lower operating income and lower other income in the current year, partially offset by lower income taxes.

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

For the three months ended April 30, 2011, net income attributable to noncontrolling interests was $165,000 compared to $72,000 in the prior year, an increase of $93,000 or 129.2%. This increase was due to higher net income for the Company’s 50% owned NQA, Inc. subsidiary in the first quarter of fiscal year 2012.

Net income attributable to NTS for the three months ended April 30, 2011 was $560,000 compared to $3,546,000 for the same period in fiscal 2011. This decrease was primarily due to lower net income and the increase in net income attributable to noncontrolling interests.

The aerospace market generates approximately 32% of the Company’s overall revenue. NTS views the aerospace sector as having nine definable sectors: large commercial transports, regional transports, business aircraft, general aviation, rotorcraft, military fighters, military transports, unmanned aerial vehicles and systems (UAVs and UASs) and space (launch vehicles and payloads). Each has its own dynamics depending on social and economic circumstances and NTS tailors its service offerings accordingly, though certain trends cross over market sectors. For example, original equipment manufacturers continue to move toward large scale integration, consolidation around core competencies, outsourcing, and globalization. These trends have provided and will continue to present significant opportunity for NTS to fill capability gaps that have emerged in the product development cycles of its customers. The careful positioning of NTS’ life cycle product services-engineering, testing, and supply chain services-enables the Company to profit in both down and up markets. In the down market, NTS fills the capability gaps that its customers cannot afford to maintain on a full-time basis. When the market turns up, NTS fills capacity gaps during these surge periods.

The large commercial transport sector accounts for the bulk of NTS’ aerospace revenue. The delay in delivery of the first production versions of the Boeing 787 Dreamliner and lack of market enthusiasm for the Airbus A380 continue to suppress the rebound of the sector. This has been offset somewhat in the last year by increased production rates of the Boeing 737 and Airbus A320. Market conditions are expected to improve with the Dreamliner now nearing completion of flight test and its competitor, the Airbus A350 XWB, now in early stages of production. Aging, fuel-inefficient fleets will need to be replaced. Forecasts call for some 29,000 new commercial aircraft valued at over $3.2 trillion through 2020.

With the exception of the UAV/UAS sector, all others are flat to declining. For example, the regional transport sector is forecast to shrink through 2020 relative to the previous ten years by 8-10% to around 3,000 aircraft. Declining defense budgets and the uncertain future of the Joint Strike Fighter will shrink the mil-aero sectors. The space sector is transitioning from 30 years of dominance by the NASA shuttle program which winds down in 2011. However, currently NTS is experiencing an increase in proposals for the heavy lift vehicle.

Despite the relatively austere market conditions, NTS is positioned to make gains as market participants consolidate and non-core skills are outsourced. Successful contributions to Boeing’s family of commercial airplanes are leading to follow-on revenue opportunities and we are also experiencing an increase in orders related to the A350 aircraft. In addition, the company is focusing on the growing UAV/UAS market and has built relationships with several of the major companies building UAVs providing testing for the vehicle and design, assembly and testing for payloads. Also, NTS expects to participate in the $3.5 billion KC 46-A tanker contract awarded to Boeing by the U.S. Air Force.

DEFENSE MARKET

The defense market generates approximately 33% of the Company’s overall revenue. The defense market remains subject to the funding uncertainties of the current administration but the propensity for in-sourcing in many areas is significantly decreasing. Although the current U.S. defense budget is the highest share of the budget compared to GDP since World War II, severe political pressure has increased cost consciousness in the Department of Defense with heavy scrutiny on maintaining test and production schedules. This is leading to increased outsourcing from government-run test facilities to independent private sector test labs. Likewise, major defense prime contractors are beginning to outsource more testing and engineering services opportunities to lean out their operations. In addition the U.S. is engaged in two expeditionary efforts in Iraq and Afghanistan that are likely to continue through CY2014. As directed by the President, the Pentagon will undertake a review of current capabilities and strategies that will shape the U.S. defense budget of the future. This review will focus on real world conditions that are not improving in the foreseeable future. NTS is strategically positioned to take full advantage of this environment. The Company’s unique life cycle product services value proposition acts counter to defense market economic cycles, providing opportunities to fill gaps in declining market conditions. Although the U.S. defense budget is expected to decline in the near future, market conditions are such that NTS anticipates that it will increase revenues by growing market share. Our competitive cost structure, breadth of capability, and continued investment in research to understand our clients changing needs and then aggressively developing capability to support these needs has resulted in increased defense related market share. The NTS defense market is well positioned to continue to expand market share and maintain our excellent growth history.

TELECOMMUNICATIONS MARKET

The telecommunications market is showing some signs of improvement. The wireless market, a subset of the telecommunications market, is continuing to show a strong rebound. Carriers are delivering voice, video and data using fiber networks and other high-speed delivery methods. New means of delivery may increase the demand for certification of suppliers’ premises equipment, and certification of new central office equipment. The growing demand for cloud-based services may provide new opportunities for carriers and service providers to help businesses extend their budgets. The Company, with multiple telecommunications facilities, including its recent NEBS approval from Verizon as a result of the expansion of the Silicon Valley facility and the addition of NEBS fire testing at Plano Texas facilities, is well equipped to grow in this market.

The NTS Energy Market currently offers multi-disciplinary expertise and capabilities to provide smart solutions to complex engineering and scientific problems in the areas of nuclear energy and smart grid. NTS will be transitioning into other energy services such as transmission and distribution, battery and energy storage, renewable generation, oil and gas, and other clean technologies. NTS also provides dedication and certification work for the domestic and international communities and believes this market has a very positive outlook as consumers, commercial businesses, industries and governments search for alternative energy solutions. NTS offers a full range of products, engineering and testing solutions. These services include seismic, environmental, EMI/RFI, radiation, equipment qualification, commercial grade dedication, mechanical aging, thermal aging, vacuum testing, leak detection, and nuclear steam accident simulations such as loss of cooling accident (LOCA) and high expansion line breaks (HELB). Seismic and vibration simulation tests are conducted on our single axis, dependent biaxial system, or independent tri-axial and electro-mechanical shaker tables and are used for a variety of customer products and applications. NTS provides technical functional knowledge of engineering fundamentals: mechanical, structural, electrical, reliability, and high technology communication and security software system test and monitoring solutions, with supply chain management focusing on assuring product integrity through quality process and product auditing, supplier improvement plans, and management of quality systems. NTS is currently evaluating new opportunities for performance testing of wind turbines and reliability and life duration testing support on products for petroleum, liquid and gas applications.

AUTOMOTIVE MARKET

In the automotive industry, alternative fuel vehicle testing is presenting signs of growth especially in the pure electric and electric hybrid propulsion devices; the industry in general is in a rebound mode and gaining traction due to high fuel costs. NTS has experienced an increase in revenues over the past year as a result of increased traditional fuel efficient and hybrid vehicle sales. NTS offers the commercial and military vehicle industries design engineering services, product testing, and verification and qualification services providing a one stop-shop for our customers. NTS’s testing services included dynamometer operations on power train components, vibration and shock on mechanical and electrical assemblies, thermal and corrosion exposures on control and monitoring systems, pressure pulsing and burst on fluid handling items and fatigue and ultimate strength on mechanical components. NTS performs testing to support requirements in emerging markets of pure electric vehicles and electrical hybrid vehicles. This includes electric motors, integrated motor/transmissions, specialized high speed transmissions, batteries and control/distribution modules. NTS also performs highly accelerated life tests (HALT) highly accelerated stress screen (HASS) and lithium battery testing to comply with UN T1-T8 test requirements (as specified on the transportation of dangerous goods manual). These tests combine extremes of temperature, rapid temperature change, and multi-axis vibration to rapidly expose design weaknesses and process flaws. NTS is accredited to ISO 17025 through the American Accreditation of Laboratories Association (A2LA). This accreditation allows NTS automotive test reports to be accepted in the U.S. and internationally.

Notwithstanding the foregoing and because of factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance.

Net cash provided by operating activities of $193,000 in the three months ended April 30, 2011 primarily consisted of net income of $725,000, adjusted for depreciation and amortization of $2,028,000, share-based compensation of $73,000 and allowance for doubtful accounts of $67,000, partially offset by changes in working capital of $2,587,000, gain on investments of $96,000 and deferred income taxes of $17,000. Net cash provided by operating activities of $4,429,000 in the three months ended April 30, 2010 primarily consisted of net income of $3,618,000, adjusted for changes in working capital of $1,832,000, depreciation and amortization of $1,787,000, share-based compensation of $241,000 and other adjustments of $32,000, partially offset by gain on sale of assets of $3,017,000.

Net cash used in investing activities in the three months ended April 30, 2011 of $1,572,000 was primarily attributable to capital spending of $1,385,000 and investment in retirement funds of $187,000. Net cash used in investing activities in the three months ended April 30, 2010 of $57,000 was primarily attributable to capital spending of $2,123,000 and cash used to acquire businesses of $2,053,000, partially offset by proceeds from sale of property of $2,293,000 and proceeds from sale of life insurance of $1,826,000.

Net cash provided by financing activities in the three months ended April 30, 2011 of $33,000 consisted of proceeds from borrowing of $872,000 and tax benefit from restricted stock issuance and stock options exercised of $28,000, partially offset by repayment of debt of $867,000. Net cash used in financing activities in the three months ended April 30, 2010 of $598,000 consisted of repayment of debt of $1,183,000, partially offset by proceeds from borrowing of $508,000, proceeds from stock options exercised of $63,000 and tax benefit from stock options exercised of $14,000.

On November 10, 2010, the Company secured a senior credit facility of up to $65 million from a banking group led by Comerica Bank that includes Bank of the West and U.S. Bank. The credit facility includes a $20 million term loan, a $25 million revolving credit line and a $20 million acquisition line. This credit facility, which will mature in 5 years, amends and restates the former credit facility which consisted of a $16.5 million revolving credit line and approximately $16.3 million in existing outstanding term debt. Interest rates under the new credit agreement are at either LIBOR plus a range of 175 to 275 basis points, or at Comerica Bank's prime rate plus a range of 75 to 175 basis points. Commitment fees on the revolving credit line and acquisition line are 25 basis points and 35 basis points, respectively.

Long-term debt as of April 30, 2011 and January 31, 2011 consisted of the following:

April 30, 2011

January 31, 2011

Revolving credit line (a)

$

10,023,000

$

10,023,000

Term loan (b)

19,500,000

20,000,000

Acquistition credit line (c)

8,130,000

8,215,000

Secured and other notes payable

5,623,000

5,033,000

Total

$

43,276,000

$

43,271,000

(a)

The Company is required to repay the outstanding principal under the revolving credit line on November 10, 2015, the maturity date. Interest accrues at the Company’s option at either (i) the Base Rate plus a specified margin ranging between 75 and 150 basis points depending on the Company’s consolidated total debt to consolidated EBITDA ratio or (ii) the Eurodollar Rate plus a specified margin ranging between 175 and 250 basis points depending on the Company’s consolidated total debt to consolidated EBITDA ratio. In the case of interest that is based on the Base Rate, interest is payable monthly in arrears on the first day of each month. In the case of interest that is based on the Eurodollar Rate, interest is payable at the end of each interest period, which is defined as one, two, three or six months after the applicable advance is disbursed to the Company (except that with respect to six month interest periods, interest is payable at three month intervals). The revolving credit line is limited to 85% of eligible accounts receivable, which equates to $16,516,000 as of April 30, 2011. The available amount on the revolving credit line was $6,493,000 as of April 30, 2011.

(b)

The Company is required to repay the $20 million five-year term loan in equal quarterly principal installments of $500,000 commencing on February 1, 2011 until November 10, 2015, the maturity date, when all remaining outstanding principal plus accrued interest thereon is due and payable in full. Interest accrues at a specified margin plus either: (i) the greatest of (a) the prime rate announced by Comerica Bank, (b) the federal funds effective rate as published by the Federal Reserve Bank of New York plus 1.0%, and (c) a daily adjusting LIBOR rate plus 1.0%; or (ii) a rate based on LIBOR. The Company refers to the rates described in clauses (i) and (ii) in the preceding sentence, respectively, as the "Base Rate" and as the "Eurodollar Rate." The specific per annum interest rate will be, at the Company’s option, either (I) the Base Rate plus a specified margin ranging between 100 and 175 basis points depending on the Company’s consolidated total debt to consolidated EBITDA ratio or (II) the Eurodollar Rate plus a specified margin ranging between 200 and 275 basis points depending on the company’s consolidated total debt to consolidated EBITDA ratio. In the case of interest that is based on the Base Rate, interest is payable monthly in arrears on the first day of each month. In the case of interest that is based on the Eurodollar Rate, interest is payable at the end of each interest period, which is defined as one, two, three or six months after the applicable loan is disbursed to the Company (except that with respect to six month interest periods, interest is payable at three month intervals).

With respect to any credit advance under this line that is used to finance eligible acquisitions, the Company is required to make quarterly principal payments commencing one year after the date such credit advance is made, until November 10, 2015, the maturity date (when all remaining outstanding principal plus accrued interest thereon is due and payable in full). No principal payments are due during the first year. The amount of such quarterly principal payments is 1.25% of the aggregate original principal amount of such credit advance during the second year, increasing to 2.50% during the third year and increasing to 3.75% during the fourth and fifth years.

Interest on the acquisition credit line accrues at the Company’s option at either (i) the Base Rate plus a specified margin ranging between 100 and 175 basis points depending on the Company’s consolidated total debt to consolidated EBITDA ratio or (ii) the Eurodollar Rate plus a specified margin ranging between 200 and 275 basis points depending on the Company’s consolidated total debt to consolidated EBITDA ratio. In the case of interest that is based on the Base Rate, interest is payable monthly in arrears on the first day of each month following the disbursement of an advance. In the case of interest that is based on the Eurodollar Rate, interest is payable at the end of each interest period, which is defined as one, two, three or six months after the applicable advance is disbursed to us (except that with respect to six month interest periods, interest is payable at three month intervals). The outstanding balance from acquisitions at April 30, 2011 was $6,500,000.

With respect to any credit advance under this line that is used to finance the purchase of eligible machinery and equipment, the Company is required to make principal payments in an amount equal to 5% of the aggregate original principal amount of such credit advance. Such principal payments are due quarterly after the date such credit advance is made, until November 10, 2015, the maturity date (when all remaining outstanding principal plus accrued interest thereon is due and payable in full). The outstanding balance from equipment credit advances at April 30, 2011 was $1,630,000.

In addition to the Comerica agreement, the Company has an additional $4,048,000 at April 30, 2011 in equipment line balances which were used to finance various test equipment with terms of 60 months for each equipment schedule at interest rates ranging from 4.39% to 7.42%. The Company was in compliance with all of the covenants with its banks at April 30, 2011.

The Company’s 50% owned subsidiary, NQA, Inc., has total borrowings of $1,575,000 at April 30, 2011 for the acquisitions of Unitek Technical Services, Inc., TRA Certification, Inc. and International Management Systems, Inc. Advances under the business acquisitions line of credit bear interest, at the option of NQA, at a fluctuating rate equal to the lender’s corporate base rate plus 0.5% or at a fixed rate based on the Federal Home Loan Bank Advance Rate plus 3.0%. Advances under the business acquisitions line of credit are due and payable, at the option of NQA, 3 or 5 years from the advance date and are subject to additional interest charges in the event of prepayment.

Substantially all the assets of the Company are pledged as collateral.

There have been no material changes in the Company’s quantitative and qualitative market risk since the disclosure in the Company’s Annual Report on Form 10-K for the year ended January 31, 2011, filed with the Securities and Exchange Commission on May 2, 2011.

The Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation with the participation of the Company’s management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, the Company’s Chief Executive Officer and Chief Financial Officer, with the participation of the Company’s management, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the Company’s first fiscal quarter that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting. Based on that evaluation, there has been no such change during the Company’s current fiscal quarter.

Limitations of the Effectiveness

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Notwithstanding these limitations, the Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were, in fact, effective at the “reasonable assurance” level as of the end of the period covered by this report.

From time to time the Company may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. Management does not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, cash flows or results of operations.

There have been no material changes in the Company’s risk factors since the disclosure in the Company’s Annual Report on Form 10-K for the year ended January 31, 2011 filed with the Securities and Exchange Commission on May 2, 2011.

31.1 - Certification of the Principal Executive Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 - Certification of the Principal Financial Officer pursuant to rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 - Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 - Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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